By Bill Sarubbi, FSC Board Member
The S&P and NASDAQ indices, both weighted and unweighted, have broken out of consolidations. The cycles for both indices point up, so higher quotes are likely. The prior resistance is now support, and price is sitting just above these support areas. This establishes an attractive reward/risk ratio in each market. Newsletter writers have gone from bullish to very bearish quickly. And now the AAII survey has more bears than any time in the last year.
In the summer of 2024, I noted that the stock market was likely to move higher. However, the big tech leaders were seen to be too extended and due for a correction. If the market was to move higher and the tech leaders were to correct, then other stocks would have to start outperforming, which has been the case. Let us analyze the prospects for these stocks through the use of cycles.
The relative strength of the equally weighted NASDAQ versus the S&P 500 turned up in late December and remains strong. This indicates that the average stock in the NDX 100 is stronger than the cap-weighted S&P 500. The big-cap tech stocks have been lagging while the smaller weights in the index have been rising. The result: Many more stocks are rising, but the equities that have the greatest influence on the indices have lagged. This is in sharp contrast to the situation in 2024 in which only 25% of the stocks outperformed the S&P 500.
The relative strength screen shows that within the NASDAQ 100, the big 8 tech stocks are ranked from number 6 (Netflix) to number 75 (Microsoft). Here are the stocks in relative strength order with the cycles' recommendations in parentheses:
- Netflix (hold)
- Meta Platforms (sell)
- Tesla (buy)
- NVIDIA (sell)
- Amazon (sell)
- Apple (hold)
- Google (sell)
- Microsoft (cycle low in March)
This monthly cycle explains the buy signal on Tesla:
Tesla Monthly Cycle
Here is another picture that explains the sell opinion on NVIDIA:
NVIDIA Monthly Cycle
The top 5 NASDAQ current relative performers are:
- Palantir
- Super Micro Computer
- Axon
- Atlassian
- DoorDash
From these new leaders, here are the stocks that can be added to portfolios now.
Super Micro came down hard, bottomed, and is now giving longer-term buy signals, supported by rising cycles.
Super Micro Daily, Weekly, and Monthly
Atlassian features technical strength and a rising monthly cycle.
Atlassian Monthly Cycle
Bill Sarubbi Bio
cyclesresearch.com
Bill Sarubbi obtained his BS in 1971 and his MBA in 1972 from NYU, becoming a member of the Foundation for the Study of Cycles in the same year. He trained as a therapist under the direction of Dr. John Pierrakos in New York for nine years. From 1972 to 1990 he worked on the buy and sell sides of Wall Street as an analyst with the Value Line Investment Survey, as an institutional broker, and as a technical strategist with PaineWebber. From 1990 to 2004 Sarubbi was with the Abu Dhabi Investment Authority, where he was a technology fund manager, North American strategist, and member of the currency hedging committee. Since 2004 he has been operating his own money management and consulting service. In the course of his work, he developed unique market analysis software. Sarubbi is a Forbes contributor and is active in groups that focus on the future and on cycles, including the Kenos Circle, a Vienna-based group of futurists. Sarubbi is based in Vienna.
NOTE: This article is intended exclusively to provide information and education to help individuals better understand cycles and the markets. However, this information is not to be construed as professional advice as to the buying and selling of securities or other investment instruments. In no event does the host express any opinion with respect to, or make recommendations regarding, the purchase or sale of any particular security or other investment instrument. There is a very high degree of risk involved in trading securities, and buying or selling decisions are solely within the personal discretion of each individual.
The Minsky risk call, featured in past reports and media interviews, is now heightened as the S&P 500 reactivates its crash pattern after finally breaking under key support at 4100 (Figure 1). This is further amplified by a broad-based breakdown in major headline U.S. indices such as the Russell-2000 and Nasdaq 100. In terms of behavioral sentiment, the S&P 500 Minsky crash pattern continues to characterize a polarization between buyers and sellers as part of a broadening top, with each higher price high (point 1, 3, & 5) and lower price low (point 2, 4, & 6). Expanding volatility becomes self-feeding. Point 5 is deemed as the “kiss of death” signal. This pattern spans from the prior highs of 2018 and includes the pre-pandemic peak and price exhaustion gap near 3400. It equates to an extended 20% price drop and net peak-trough drawdown of 30% from the all-time highs of 2022.
Currently, there remains a divergence in bearish sentiment versus real positioning with initial spikes in fear indicators, but still no panic, thereby implying further capitulation ahead. A notable example is AAII cash position and allocation into equities, which signals the mood of investors is more bearish than positioning (Figure 2). Global equities remain bearish, marked by the EM top in Q1 2021, the global market breadth and the MSCI World (ex. U.S.) top of June 2021, followed by the major breakdown of growth vs. value in Q1 2022.
Market internals continue to be fragile in the U.S., led by mega cap technology and the ongoing FAANG stocks being de-faanged. The chart breakdown still warns of an extended 40% price drop into pre-post pandemic levels (Figure 3). Watch AAPL, MSFT, and semiconductors for further downside risk.
A key driver has been the prior growth-value rotation during the reflationary cycle of spring 2020. However, in January 2022, the first reversal was triggered on the MSCI World Value chart, which is part of a distributive top phase that is verging on a breakdown under key support (Figure 4). The negative domino effect is also now translating to other sectors, notably steel and miners, with increasing evidence of a top in late cyclical sectors. This would mark an interim top in commodities, marked by energy-oil as the last domino to fall, exasperated by a deflationary bust scenario of the 2022 bull cycle and rising socio-economic concerns.
A key measure of the unwind of selective bubble phenomena and related greed trades will be the completion of a top in Bitcoin as part of the major bear market ahead and potential Darwinian winter period in digital assets over the next few years (Figure 5).
A confluence of market timing headwinds remains, with both seasonality and our composite cycle warning of growing mean-reversion risk into H2 2022 and 2023 (Figure 6). More to follow on seasonality timing patterns in future FSC blog articles.
Author: Ron Willian, FSC Development Director
Read Ron William's full bio here.
By Bill Sarubbi, FSC Board Member
May 28-30 is likely a low. The period of May-June, EOM strength will begin on May 31 and run to June 12. This period has been up 64.4% of the time. The expected return is the sixth highest of the 12 months. June is likely to be a positive month. This period of strong seasonality is supported by dynamic cycles. Below, are both the daily and the weekly S&P cycles. The buy signals have been accurate 92% of the time (10 of 12) in the last year. All 6 weekly buy signals have been profitable. The combination of this trio of rhythms will likely propel the S&P to 4250 and higher.
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Take a look at an 82- to 84-year cycle of disruption, revolution and great change, from the history of world events to Harry and Megan and turmoil in the British Royal Family.
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ABSTRACT
The importance of analyzing sentiment cycles of active money managers plays a critical role in assessing financial risk. Dominant cycles in the National Association of Active Investment Managers Exposure Index have been identified with high correlation over the past 15 years. The current state of the dominant cycles indicates a possible reversal for U.S. equity markets.
The Importance of Sentiment Cycles
In 1949, investing legend Benjamin Graham eloquently characterized the cyclical nature of financial markets in his book “The Intelligent Investor”:
“The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism.”
Normally, social mood waxes and wanes positively and negatively. Thus, sentiment waxes and wanes in the form of dynamic cycles. Mood refers to a feeling, emotion, or attitude about something, and, of course, it can have a range of values. Whenever mood is related to corporations or the economy, the character of events will unfold in the related financial assets. Fear and despondency represent one extreme, while thrill and euphoria characterize the other end of the spectrum.
Cycles are the important structure because sentiment does not jump rapidly from one state to another. A change of mood requires time; therefore, sentiment moves in dynamic cycles or waves.The challenge is to spot and predict the extreme turning points observed at market tops (“Maximum Financial Risk” - Euphoria) and at markets lows (“Maximum Financial Opportunity” - Panic).
If you have data sets that provide raw “mood” information related to financial assets on the one hand, and on the other hand have cyclic tools that can decipher and track dominant cycles, we are able to provide supporting market analysis to adjust your active investment risk.
Against this background, a cycle analysis of the NAAIM Exposure Index was performed. The NAAIM Exposure Index represents the average exposure of active investment managers to the U.S. equity markets. A value above 100 indicates leveraged long positions. The raw data of this publicly available index is not predictive in nature. However, the exposure index provides insights into the actual risk management of investment managers. In the case that cycles are found in that dataset, it will allow a prediction of future exposure and risk management efforts of that group.
Our performed cycle analysis for the entire NAAIM dataset revealed two dominant cycles: cycles with a length of 73 and 184 weeks. Both cycles were added to a superposition wave, which simply combines both cycles in terms of their phase, amplitude, and length into one combined wave (Chart 1).
Chart 1: Superposition Composite Cycle (73w + 184w) in the NAAIM Exposure Index, S&P500 Index, Data as of Feb. 1 2021
The composite cycle shown is significant because >90% turning points from the exposure index composite cycle correlate with important market reversals. The composite cycle indicated:
- 2007-2009 17-month bear market during the financial crisis
- 2009 market low
- Short-lived bear market between May and October 2011, which was indicated by the high of the sentiment cycle just before Black Monday on Aug. 8, 2011, when the U.S. was downgraded
- 2014-2015 period began with an indicated sentiment cycle top and resulted in a sideways moving market
- 2016 sentiment cycle low, which indicated the start of a truly remarkable year for financial markets
- Predicting the end of the boom in early 2018, with 2018 being a worse year for financial assets. Since January 2, 2018, the S&P has fallen 8% until year end
- Pointing to the start of the next market upswing beginning in early 2019, indicated by the low of the composite cycle with a gain of +60% to date since the indicated December 2018 composite cycle low
Today, at the time of writing, we have reached the next projected composite cycle high for the NAAIM Exposure Index.
Based on the dominant cycle composite analysis of investment managers’ exposure to the U.S. equity markets shown, the current cycle top and past correlations suggest a trend reversal in U.S. equity markets is imminent.
Lars von Thienen
Mr. von Thienen is founder and CEO of a German-based IT management company. He develops algorithms and software for cycle detection at whentotrade.com and has published two books on cycle analysis. He is a Member of the Board of the Foundation for the Study of Cycles. Appointed by the Minister of Justice, von Thienen has served as a commercial judge for over a decade in Germany. Von Thienen is based in Germany. email: lars[at]cycles.org
REFERENCES
- NAAIM Exposure Index: https://www.naaim.org/programs/naaim-exposure-index/
- Cycles App: https://cyclesdev.wpengine.com/
To download Dominant Cycles Report by Lars von Thienen, click here.